The following is a simplified FI balance sheet:

The average maturity of loans is four years and the average maturity of deposits is two years. Assume loan and deposit balances are reported as book value, zero-coupon items.
a. Assume that interest rate on both loans and deposits is 9 percent. What is the market value of equity?
b. What must be the interest rate on deposits to force the market value of equity to be zero? What economic market conditions must exist to make this situation possible?
c. Assume that interest rate on both loans and deposits is 9 percent. What must be the average maturity of deposits for the market value of equity to be zero?

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Assets Liabilities and Equity Loans S1,000 Deposits $850 Equity $150 Total assets Total liabilities & equity